Three Waves of Indian Software Industry — Part I

When I started JamBuster with Suneeta in 2004, I wanted to build a technology management software products company in India. Little did I know, that we would be part of a three-wave phenomena in software industry in India.

The first wave of this is the software outsourcing, now a bit old story, but still the legend by itself. By different accounts, the outsourcing of software development by global multinational companies started in mid-1980s. This trend while definite was still very slow, but steady as seen by the fact that Infosys, the iconic harbinger started in 1981 had grown to only $20 MM by mid-1995 with about 900 people. The Y2K fears fueled an unprecedented growth, so much that by March 2000, the revenues grew to more than $200 MM — a ten-fold growth in 5 years. The exponential part of the S curve has just begin. By 2005, revenues grow from $200 MM to more than $2 B. The Infosys employee population grew from 20,000 in 2005 to more than 100,000 by 2010. The break necking growth created it challenges and by 2010, it was clear that the Software Industry has entered the final leg of the S curve, with growth tempering off.

By 2010, Indian software outsourcing pioneers of 1980s, Infosys, Wipro and TCI had become multi-billion dollar giants, each with more than $4Billion+ in annual revenues, 100,000+ employees and ADRs on global prestigious stock exchanges. The Indian Software Outsourcing Wave that started in an apartment in 1981, now has turned into a $100B+ IT outsourcing industry. The Indian Software Revolution, however, was just starting with the second wave.

The pioneering success of Citibank and GE in leveraging India for business process back office work, paved the path for global in-house (GIC) or captive India Software Centers. GE was one of the first multinational companies to outsource back-office work, data center and call center operations to a subsidiary in India, and its outsourcing operation, with a staff of 17,000 by 2004, is one of the largest set up in the country by a multinational company.

Next wave was just beginning to gather the steam- the multinationals opening their captive R&D centers for software and other expertise. By year 2000, thus global giants were starting not only to look at India for outsourcing, but also for permanent resources for in-house software development. Between 1995 to 2000, more than 50 companies had opened their dedicated software development center in India. More than 500 companies had opened captive software offshore development centers in India by 2005.

According to NASSCOM, by 2012, 750+ Indian Captives of multi-nationals had reached annual revenues of USD 13.9 Billion. With more than 450,000 employees, it is now 21% of IT export revenues and 1% of India’s total GDP in FY 2012. Of the 750+ captives, about 28% of them have multiple locations in India. NASSCOM reports that by category, 50% are Engineering R&D, 40% hybrid, 5% BPO and about 5% IT. What is staggering that in last two years about 200+ Engineering R&D captives established in the last four years.

What started as maintenance or testing jobs, Y2K fear, had permanently opened India as a key resource destination for multi nations. The focus to use these resources to get better value means that with over 700 software captives that employ 400,000 employees, India houses critical technology hubs for some of the largest corporations in the world.

These centers have evolved into doing more IP-driven work, including product architecture and complete design, apart from fully owning the product or product line. Their contributions to global parent is getting recognized from a recent trend. Global in-house centers (GICs) or captive units in India of major multinational companies such as Target, Bank of America and HSBC are starting to shift lower-end services such as application maintenance and testing to vendors, and are focusing on more complex product development projects, according to industry experts.